The Three Statements

SEC stands for

Securities and Exchange Commission

FASB stands for

Financial Accounting Standards Board

GAAP stands for

Generally Accepted Accounting Principles

Income Statement

Financial statement that reports a company’s Revenue, expenses, and profits over a period of time

Cash flow statement

Financial Statement that reports a company’s actual cash and change in cash based on operational, investing, and financing over a period of time

Balance sheet

Financial statement that reports a company’s Assets, liabilities, and equity at a snapshot in time

Income Statement Simplified

Revenue - expenses = profit

Revenue

Money generated from the sales of goods and services

COGS

Cost of goods sold, direct cost of producing goods of services

Expenses

Operational costs that help maintain the business

Net income

Money remaining after all costs and expenses are paid

Income Statement Part 1

Revenue - COGS = Gross Profit

Income Statement Part 2

Gross profit - OpEx = Operating Income

Income Statement Part 3

Operating Income - Interest & Taxes = Net Income

Walk me through the line items in the Income Statement

Start off with Revenue [TOP LINE]

Subtract the COGS (Cost of Goods Sold)

To get to your Gross Profit

Subtract out OpEx (Operating Expenses)

Get your EBIT (Operating Income)

Subtract out Interest & Taxes

To get to Net Income [BOTTOM LINE]

EBIT

Earnings Before Interest and Taxes (Operating Income)

Income Statement Rule 1

Must 100% correspond to the income statement’s period

Income Statement Rule 2

Must affect the company’s taxes/net income ie. if the item goes straight to equity (dividends) or liabilities (debt repayment), the item does not appear on the income statement

Income Statement Rule 3

Line item must be a revenue, expense, gain, or loss

Income Statement Always Appears List

Revenue, COGS, OpEx, Depreciation, Amortization, Stock Based Compensation, Interest, Gains/Losses, Write Downs, Other Income/Expenses, Taxes, Net Income

Income Statement Never Appears List

Capital Expenditures, Purchasing or Selling Investments and PP&E, Dividends, Issuing or Repaying Debt, Issuing or Repurchasing Shares, Changes to Balance Sheet Items such as Cash, Debt, Accounts Receivable, Accounts Payable, etc.

Accrual accounting

Used by most businesses and measures financial performance based on when things happen rather than when cash moves

Revenue recognition principle

Record revenue when it is earned (good or service delivered) and realized (cash received or realizable (high certainty)

Matching principle

Match expenses to revenues in the same period, even if the cash was paid earlier or later

COGS is reported when…

the sale happens, not when inventory is bought

Accounts Receivable

money customers owe your business for products/services delivered on credit

Accounts Payable

Money your business owes to others

what is CapEx

Capital expenditure is the money a company spends to buy/build/upgrade long-term physical assets (buildings, land, vehicles, machinery)

Operating Cash Flow

Cash generated (spent) from the delivery of regular goods or services

Investing Cash Flow

Cash generated (spent) from the purchase and sale of assets and investments

Financing cash flow

cash generated (spent) from raising funds through debt and equity and issuing dividends

what are the three ways cash can be generated/spent

operating cash flow, investing cash flow, and financing cash flow

Operating cash flow is affected by

assets and liabilities from the balance sheet

Investing cash flow is affected by

assets from the balance sheet

financing cash flow is affected by

liabilities and equity

cash flow from operations answers:

how much cash does the core business generate?

cash flow from investing answers:

how much is being spent on long-term assets that help the business grow?

cash flow from financing answers:

how is the business being funded and how is capital being used?

assets

resources a company owns that will generate additional cash in the future

liabilities

items that fund a business and will result in less cash in the future

shareholder’s equity

capital attributable to company owners

Assets are divided into

current and non-current assets

current assets

can be liquidated in 1 year or less

non-current assets

can be liquidated in more than 1 year

list of current assets

Cash and Cash Equivalents

Marketable securities

Short-term Investments

Accounts receivable

Inventory

Prepaid expenses

list of non-current assets

Long term investments

Plant, Property, and Equipment (PPE)

Intangible assets

Goodwill

Deferred tax assets

Equity Method investments

liabilities are also divided into

current and non-current liabilities

list of current labilities

Revolvers

Current portion of long term debt

Accounts payable

Accrued expenses

Deferred revenue

Interest / Taxes / Dividends payable

list of non-current liabilities

long term debt, lease liabilities, deferred tax liabilities, pension fund liabilities, asset retirement obligations